With Yahoo win, Verizon sidles up to Google, Facebook

Those legions of followers in the old Verizon “Can you hear me now?” ads (now hijacked by Sprint) seemed to be coming for your ears, but it turns out they wanted your eyeballs.

In an anti-climactic announcement expected Monday morning, Verizon will make it official that it has finally nabbed the next early Internet portal it’s been circling for quite awhile, buying Yahoo’s core assets for $4.8 billion. Yahoo – whose brand will reportedly be kept by the phone giant – will be paired with AOL, founded 10 years before Yahoo’s 1995 birth.

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Given the magnificent and rich web history involved in all things Yahoo, we can plot many storylines with this midsummer buy. Yet

the Yahoo/AOL pairing – with its elusive promise of offering Madison Avenue a “Third Choice” in digital advertising – it is clearly data-driven ad sales that drives the deal. Third Choice is a concept well discussed within AOL, and some others within the advertising community, as the duopoly on digital advertising by Google and Facebook picks up even more speed this year.

The final bid – against several private equity bidders over time, and interest from head-to-head competitor AT&T – completes a historic tale of loss of way for Yahoo, a company whose market cap once had soared to $140 billion.

Verizon is buying one big thing: reach, and the consumer data that comes along with it. Yahoo still shows in the unique audience horse race in the U.S. With 208 million visitors in June, it finds itself more than 30 million behind Facebook and 50 million behind Google, with long-distance runner Microsoft nipping at its heels.

That topline number, of course, isn’t Yahoo’s biggest problem. As Google has uniquely monetized its big trick, search, and Facebook likewise with social, Yahoo – under a succession of CEOs, Marissa Mayer its final one – never found its next generation identity. Once a portal – after first life after as an imaginative-for-1995 web directory – always a portal, a jack of all things web and never really a master of any to them.

As I detailed (POLITICO “Five numbers that show why Yahoo is the zombie planet of the internet”) last week, though, almost every indicator of Yahoo’s corporate health has been declining for quite a while. From a declining digital audience to a shrinking workforce and a relatively poor revenue-per-employee ratio, Yahoo became a well-off orphan. Its price of $4.8 billion then serves both as a reflection of its decline, but also of the residual value of even dissolving brands.

It is another CEO, AOL’s Tim Armstrong – who sold his company to Verizon just a year ago for a like $4.4 billion – who gets to have a last laugh. As both AOL and Yahoo became punchlines, Armstrong, long ago Google’s head of sales, set out to remake his ad technology and sales force. He convinced Verizon that it was his ad tech wizardry that would propel the future-seeking telco into the brave, new digital world. Now, Verizon CEO Lowell McAdam has literally doubled down on that strategy.

The message to America’s top advertisers: You will now have a big, smart alternative to Google and Facebook.

By some accounts, Google and Facebook – currently enjoying the fruits of their superior investments and long-range planning for mobile advertising – command 90% of all new digital ad spending in 2016, as measured by Jason Kint, CEO of Digital Content Next, the leading online publishers’ trade association. Overall, the two – with Facebook’s share rising most quickly – now take 64 cents of every digital ad dollar spent in the U.S., with comparable and higher shares abroad.

For advertisers, that kind of seller dominance gives pause. Tim Armstrong, then, seeks to combine all those Yahoo, AOL and Verizon assets, on the foundation of the ad platform he’s been building through development and acquisition for years. The company has completed 19 acquisitions, heavily concentrated in advertising, marketing, mobile and video, since Armstrong became AOL’s CEO in 2009.

On the web, there’s no singular endgame, but this week’s Verizon/AOL/Yahoo consolidation offers the 50-year-old Armstrong a victory lap.

How good is Armstrong’s tech? It’s good, many observers say. No matter how good it is, they ask, can it really compete with the targeting and pricing Facebook and Google can offer?

Verizon now moves firmly into media land. It’s a phone company with lots of cash flow, but it is repositioning itself into a media company [POLITICO: “What does Verizon want with Yahoo”].

Given its AOL acquisition and own ad sales, through new initiatives like Go90, it can claim to be among the top five in digital display advertising, about on a par with Twitter (each with 4-5% of the $13.9 billion non-mobile display category) in revenue. Further, AOL’s partnership with MSN to sell its advertising means that Armstrong is aiming to concentrate ad inventory from three of the top five display ad impressions sources, AOL, Yahoo and MSN.

Verizon’s financial reporting is fairly opaque, but it’s clear in the short term of just a year, AOL’s revenue (including its higher-profile Huffington Post) helps Verizon out of negative revenue growth territory. Verizon, too ,struggles with legacy transformation, as do its media cousins. It has largely made its first transformation -- wireline to wireless -- but faces more.

Today, Verizon is still a phone company, though with 70% of its revenues, and 112 million data-based customers, come from the mobile side of the business. There, it faces a market that has quickly matured. Further, it finds growth tough in its further extension, and pricing, of its smaller broadband and TV businesses.

Calling itself a “a communications company,” it will probably see its new AOL/Yahoo media group generate no more than five percent of Verizon’s overall income in its first full year.

To its credit, some of those working in AOL properties that Verizon acquired last year give it credit for taking shorter-term profit pressures off of their businesses, allowing them to make investments that will pay off over years, not just quarters. In that regard, we hear echoes of the phrase being spoken at The Washington Post, and more widely in the struggling newspaper industry. Upon his first visit to the Post, Bezos promised “runway,” and has delivered.

Of course, Yahoo is no Washington Post. While it has employed hundreds of journalists over its two decades of life, most have moved through the chaotic company relatively quickly. Publishers could assemble a dream team with the best of the editors, reporters and columnists who have passed through its portals. At this point, though, insiders tell me that its content origination strengths have much winnowed. They point to Yahoo Sports as the company’s original content leader, with aggregation of Other People’s Content now much characterizing both Yahoo News and Yahoo Finance.

All three of those areas – Sports, Finance and News – do make AOL, and Verizon salivate. AOL has had plays in all three for a long time, but none are distinguished. It is the combination of audiences – and presumably products, over time – that may tell the tale of financial success or failure in this deal. In the massive consolidation to come – AOL may bid good-bye to at least a third of Yahoo’s 9,000-strong workforce. As in all such mega-mergers, consolidation will consume much of the next year. Armstrong faces that strong, as he faces ever-tough market pressures.

Armstrong’s Third Choice strategy means ever-better targeting of digital audiences, using the foundation of that old telco, as a foundation.

That’s why we can call Verizon a Nuevo Telco. It’s got the distribution – those hot phones in our pockets – but, oh what does it want to do with them? Can a legacy phone company really become a big five digital media player?

Can near-digital native Armstrong pull off that coup, using the platform and financial cushion of Verizon to ascend? The Verizon Yahoo acquisition also throws down a new gauntlet.

The new pipes companies -- AT&T, Comcast and the new expanded Charter Cable, in addition to Verizon – have all been built by M & A. Comcast has bought heavily into media, with NBC Universal, but what further steps might it take, and will AT&T and Charter design their own games of media ascendance?

Verizon now launches many a meeting about how to nest its three – Verizon, Yahoo, AOL – brands. By early 2017, we should see new kinds of products and apps aim to cross the frontiers between hardware and our consciousnesses. That’s a three-dimensional chess question – and one with regulatory implications.

As a major supplier of Internet access in the country, Verizon is subject to FCC rulemaking on privacy. Currently, the FCC in the rule making process for its privacy rules for broadband providers. Draft rules include obtaining opt-in consent – wherein consumers have to affirmatively allow such providers to use their personal data for targeting. That rulemaking is one to watch, and speaks to much larger questions of “pipes company” advantage and publishers places in the ecosystem, as regulators wrestle with the thorny issues of “data privacy.”

Given that the Verizon/AOL/Yahoo combo is all about data, laden, cross-platform value, these issues could have significant impact on the real value of Verizon’s $4.4 billion buy.